Lately, the Cyprus Securities and Exchange Commission (CySEC) has been making the news a lot – to the extent that it has hired a PR agency. After issuing fines and reaching settlements worth over €1.3 million in November, and apparently intending to announce even more, it has also informed binary option brokers that it discourages one of the instrument’s most speculative features.

But it was the decision to activate the Investors Compensation Fund (ICF) that touches on a little discussed, yet immensely important topic for the local industry.

A CySEC license allows Cyprus Investment Firms (CIFs) to operate throughout the European Union. Much like its European counterparts, it carries certain obligations towards clients, one of which, and arguably the most important, pertains to compensation in the case of insolvency.

While a lot has been written about the British Financial Services Compensation Scheme (FSCS) in the aftermath of the Alpari UK bankruptcy, the ICF has not attracted too much media attention.

With clients of certain brokers still waiting for their withdrawals, and European regulators forcing CySEC to act more diligently, a big question for the ICF is whether it can meet clients’ demands in the case of a big brokerage failing to meet its client obligations.

Since CySEC took the first steps in what is to be a systemic approach to supervising regulated brokers more actively, clients of regulated CIFs who have been affected with several compliance issues wonder what would it take to trigger a payment from the ICF.

Organizational structure and broker contributions

Xenia Kalogirou, a senior member of Cyprus-based AGP Law Firm, has helped to shed some light on the details of the scheme, explaining how brokers contribute to the fund’s resources.

Brokers that operate as market makers pay an initial fee of €22,212, while companies that only provide straight-through processing of client orders pay €13,669. If the broker operates both models, the company pays as a market maker.

In addition, if the brokerage deals with its own account it pays an additional €17,086 fee, while if it manages portfolios it must provide an additional sum totaling €25,629. If the brokerage also underwrites financial instruments and/or places financial instruments on a commitment basis, it has to pay an additional €17,086.

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Initial ICF contributions by brokers can vary depending on the specific needs of their business

For CIFs offering the service of safekeeping and administration of financial instruments for client accounts, including custodianship and related services such as cash/collateral management, the additional fee is €20,503.

Separately, each CIF is required to pay up to one per mille of the eligible client funds which it holds.

As far as compensation for traders is concerned, maximum levels are much lower than in other regulatory jurisdictions, with a €20,000 ceiling. While this should satisfy most clients’ demands, how CySEC evaluates the conditions under which clients are entitled to compensation remains a mystery, as the fund has rarely been used up until now.

How is an ICF payout procedure triggered?

CySEC and Cyprus courts have the authority to trigger an ICF payout event

According to Ms. Kalougirou, there are two ways in which a payout from the ICF can be triggered. The first is based on a CySEC decision, determined either by the board of CySEC or upon a request submitted to it by a covered client or a member of the ICF.

The second way is if a competent supervisory authority or any other person with a legitimate interest, such as the Official Receiver or the liquidator of the bankrupt brokerage, files a case according to the provisions of the Company Law in Cyprus.

What if ICF funds are insufficient?

Finance Magnates understands that the funds currently held at the ICF in Cyprus total close to €17.5 million ($19.3 million). Looking at the figures of some CySEC regulated brokers, it is quite clear that a scenario where client demands might exceed the fund’s resources is not unrealistic.

According to provisions in the law, if the ICF does not hold sufficient finds to meet all client claims, there are several ways for CySEC to fill the gap. The regulator may call on members of the ICF to commit extraordinary additional resources, or borrow funds from banks in Cyprus or abroad and ask the ICF members to pay up a supplementary contribution to fill the gap afterwards.

A third option is conditional on an insurance company having insured the ICF for up to a certain amount in case a policy event is triggered. Finance Magnates understands that at present this seems to be the least likely option, as CySEC has not disclosed whether the fund is insured with a specific company.

Disclaimer: This article and the opinions expressed in it do not constitute a legal opinion.

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paul

Nice article.
In Cyprus they should do 2 things.
1. The cops should issue tickets for all driving & parking offences, thus clearing the national debt in 1 week.
2. CySec should clamp down harder to generate funds for when said brokerage goes down. They could easily raise alot more funds for what could be a very testing year for all in the industry,

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4 years ago

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saad sidat

I personally believe this is a great initiative and should be implemented. On the other hand the shortfall in ICF should be insured so that at the time of crisis there is no panic. I wouldn’t even mind being a broker myself that if the shortfall needs to be compensated by other market participants (brokers) which should be equivalent to a certain percentage of the client collaterals they hold.

If brokers are running towards getting a regulation for attracting clients, they should be willing to pay up for it as well…

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4 years ago

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Christos Angelis

I don’t understand why this was flagged inappropriate!!

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4 years ago

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Hamish Raw

Interesting. It would appear that irrespective of the CYSEC regulated company’s business model, or indeed in the competent manner in which the company manages it’s market exposure, all companies can be hooked in to cover a CySEC deficit in the event of a default. If we look at the Swissie lash-up earlier in the year even some of the bigger houses took hits, e.g. $30m at IG, yet not one binary options provider took a damaging hit which is hardly surprising since a portfolio of binary options has a built in stop-loss. So, if one of the bigger Cyprus-based FX… Read more »

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4 years ago

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Christos Angelis

what you say makes sense, however, I must point out that CySEC license has enabled many options brokers gain credibility and clients that they would otherwise not have! so I guess what I’m saying is: you gain some, you lose some!

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4 years ago

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insider

Hamish, do yourself a favor – what you say is simply wrorng. “since a portfolio of binary options has a built in stop-loss” – is that a joke? do you even understand what happened during the SNB and why no stop loss could have saved any position? please Google “gap” and come back to us with improved insights. Regardless, binary options didn’t take a hit – because of several reasons, one of them is that they are not transparent at all and some of them may have taken up losses which they either won’t admit or simply won’t credit to… Read more »

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4 years ago

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con

Yes you are correct, Binary brokers and any other regulated Investment Firms would also take the hit.

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4 years ago

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Serge

No they didn’t. Binary brokers are not “brokers” at all, they a pure b-book betting firms. No “options” are sold or bought, all client’s money swim in closed boiler room.

So, binary firm is covered in all senses.

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4 years ago

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con

They forgot to mention that every year all Cyprus Investment Firms contribute to the ICF an amount proportional to their turnover.

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4 years ago

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Nick Assimenos

We wonder whether Xenia Kalogirou, (“a senior member of Cyprus-based AGP Law Firm”) is related to Demetra Kalogirou, the chairman of CySEC!

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4 years ago

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Christos Angelis

Cyprus is only 800,000 people. many people are related here. but also many similar surnames exists…
in any case, the law firm you put in “quotation” marks does exist and is well known.